Mortgage-backed securities I | Finance & Capital Markets | Khan Academy
# Understanding Mortgage-Backed Securities
## Introduction
Welcome to my presentation on mortgage-backed securities. This is the beginning of a new series of presentations aimed at shedding light on the current state of the credit markets. The significance of this topic from both a personal finance and historic perspective cannot be overstated. In this series, we will delve into how everything fits together and explore the possible repercussions.
## What is a Mortgage-Backed Security?
To understand mortgage-backed securities, let’s first consider the traditional process of obtaining a loan for a house. When seeking a loan, typically backed by the house itself, the borrower borrows a sum of money from a bank and pledges the house as collateral. If the borrower is unable to repay the loan, the bank takes possession of the house.
## Traditional Loan vs. Mortgage-Backed Security
In a traditional loan scenario, the borrower receives the loan directly from the bank and makes payments to the bank, including both interest and principal. On the other hand, in a mortgage-backed security, the bank sells the loans to a third party, allowing the borrower’s payments to go to this new entity.
## The Process of Mortgage-Backed Securities
In the case of mortgage-backed securities, multiple borrowers collectively borrow funds from a bank. The bank then groups these loans together and sells them to an investment bank, receiving a lump sum in return. Subsequently, the borrowers make their payments to the investment bank, which now owns the loans.
## Conclusion
The development of mortgage-backed securities has revolutionized the lending industry by enabling banks to free up capital and generate additional revenue through the sale of loans. This practice has reshaped the way financial institutions manage and distribute risk in the housing market. As we continue this series, we will further explore the intricacies of mortgage-backed securities and their impact on the economy. Stay tuned for more insights into this complex yet vital aspect of the financial world.
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